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Ascending Wedge Pattern in Technical Analysis

By Stelian Olar, Updated on: Feb 07 2024.

The rising wedge pattern is a well-known price chart pattern used widely in technical analysis of the financial markets. The rising wedge formation signals a potential trend reversal in the prevailing trend across stocks, commodities, currencies, cryptocurrencies, and other asset classes.

Spotting the ascending wedge requires identifying a sequence of higher highs and higher lows, bound within upward-sloping and converging trend lines. As the pattern develops, the trading range narrows and prices consolidate to a point known as the apex.

While symmetrical triangle patterns have no bias, the ascending wedge pattern has a definitively bullish slope but ultimately form a bearish reversal pattern when completed but the wedge can also act as a bearish continuation pattern against an existing downtrend.

In either case, ascending wedges are overwhelmingly bearish patterns once completed.

In this comprehensive guide, we will cover:

• Defining characteristics of the rising wedge stock pattern
• Answering is a rising wedge bullish or bearish?
• Distinctions between an ascending wedge and other formations like the broadening wedge pattern, expanding wedge, falling broadening wedge, etc.
• Using volume analysis to validate bearish rising wedges
• Trading ascending wedges as reversal signal and continuation
• Setting entry orders, stop losses, and the price target
• Real chart examples from the stock market illustrating ascending wedges

The analysis will reference technical concepts like support, resistance, breakouts, volume, trends, and risk/reward ratios.

With the right knowledge, traders can effectively spot rising wedge stocks across the financial markets and capitalize early when the pattern completes. This guide will equip readers to confidently identify and trade ascending wedges across any asset class.

What is a Rising Wedge Pattern

The rising wedge represents a critical candlestick pattern that forms in uptrend and it is defined by two converging trendlines that form a wedge shape as a security's price rises. The lower support line connects a series of higher lows, while the upper ascending resistance line connects a series of higher highs.

As the rising wedge chart pattern takes shape, the two trendlines narrow to form an apex:

• The upper resistance trend line shows where the price touches before beginning to drop lower,
• While the lower support trend line displays where buyers enter.

These increasing peaks and increasing troughs indicate decreasing trading momentum that typically leads to a bearish reversal pattern breakdown. Once completed, this rising bearish wedge signals by analyzing characteristics like the slope, candlestick touches, and volume that the prior uptrend is ending and could lead into a strong push downward.

What Is the Psychology of the Rising Wedge

When a rising wedge forms in a price chart, typically emerges within a strong uptrend rather than in a downtrend, enticing more buyers to enter on pullbacks as the price action makes higher swings indicating a dynamic battle between increasingly cautious bulls and confident bears in the market.

Support and Resistance Trend Lines Converging

However, the energy starts fading as the market is also attracting more bears, sensing the uptrend losing steam each time the ascending pattern puts in place a new swing high slightly above the previous swing high which signals bulls growing more hesitant up near the resistance line.

The psychology shifts once the lower support line is breached to the downside.

The market quickly moves into distribution mode rather than accumulation, with previous bulls now rushing to exit positions which creates a surge of selling pressure, allowing bears to take control and initiate new short trades for the impending downtrend.

This answer is an ascending wedge bullish or bearish because the rising wedge captures a tug-of-war where bullish conviction melts away as more bears detect weaknesses building in the upward move.

What is the Target for the Ascending Wedge Pattern

Once an ascending wedge completes and a bearish breakout occurs, traders can estimate potential downside price targets and there are quite a few methods to project targets following the pattern breakout:

1. Measuring Rule Method: Use the maximum height of the wedge and project that distance lower from the breakout. For example, if the wedge height is $10, the minimum target is $10 below breakout.
2. Swing Low Method: Measure from the breakdown point to next nearest significant swing low.
3. Extension Method: For very well-defined wedges, Fibonacci extensions can forecast areas where selling pressure may be exhausted. Common extension levels are the 127% and 161% measured from the starting wedge trendline break.

In general, traders employ multiple target methods and watch price action, volume cues, and momentum oscillators to help guide exit decisions. Ultimately, only well-constructed rising wedges can see incredibly large, impulsive swing trades as bears take command of the trend.

Key Characteristics of an Expanding Wedge Pattern

There are a few important features to identify when confirming the validity of a rising wedge pattern in a price chart:

1. Uptrend: the pattern emerges within a defined uptrend of higher highs and higher lows
2. Upward Sloping Convergence - Valid ascending wedges display convergence between an upper resistance trendline and lower support trendline that both slope upward but the upper resistance line will have a flatter slope relative to the more steeply angled support.
3. Contraction in Price Range - As the pattern progresses, the price swings should contract to form higher highs and higher lows that are smaller in amplitude. This narrowing trading range represents tightening volatility that precedes sharp breakouts of the ascending narrowing wedge.
4. Falling Volume - Volume typically diminishes within emerging rising wedges, confirming waning commitment from buyers. By the time the pattern nears completion, lackluster upside interest foreshadows the ultimate bearish reversal.
5. Bearish Breakout - The chart pattern is validated when the price breaks below the wedge’s support trend line.

Types of a Broadening Wedge Pattern

There are a few key types of rising broadening wedge chart patterns that traders watch for with the main forms including:

1. Ascending broadening wedge
2. Descending broadening wedge
3. Horizontal broadening wedge

Ascending Broadening Wedge

The rising broadening wedge features higher highs and higher lows that broaden into wider trading ranges as the ascending broadening wedge pattern develops with each swing high reaching further highs in a stepped pattern and lower swing lows also rising over time.

Also called a bullish megaphone pattern, the ascending broadening wedge are bearish reversal signals because they form during rising volatility.

Descending Broadening Wedge

The descending broadening wedge pattern resembles a bearish megaphone pattern and can be identified by lower lows and lower highs as the price range expands downward. This type of broadening formation signals a potential buying opportunity no matter if the stocks megaphone pattern develops in a downtrend or in an uptrend.

Horizontal Broadening Formation

With this type of broadening wedge, the trading range widens with mixed higher/lower swings and no defined upward or downward slope that suggests volatile consolidation before a major breakout.

Analyzing the type of broadening wedge taking shape provides clues on future trend direction. While the ascending broadening wedge pattern displays bullish continuation potential, the descending expanding wedge pattern tends to form bearish reversals - especially in stocks with high volatility.

Trading the Rising Wedge Pattern - Strategies for Beginners

When approached systematically, even novice traders can learn to profit from rising wedge reversals and breakouts. Here are effective strategies for trading rising wedge pattern or if you want to trade a megaphone pattern:

1. Step #1: Confirm the Wedge - Accurately identify rising support and resistance lines containing price. Here is a secret tip to watch for contracting range and falling volume as the chart pattern nears completion.
2. Step #2: Set Entry Orders - Place pending sell stops just below rising support to trigger when the bearish breakdown begins or enter short positions on the pullback and retest of the previous support level.
3. Step #3: Use Stops - Employ tight stop losses above contracting highs or wedge resistance to limit risk on the trades and move to breakeven once price reaches pattern targets.
4. Step #4: Check Broadening - If support/resistance lines begin widening instead, switch to ascending broadening or descending broadening tactics.
5. Step#5: Scale Out - Consider taking partial profits at the 1.272 Fibonacci extension and the remainder at 1.618 extension of starting wedge height.

With the right approach, even novice traders can effectively trade the rising wedge and the expanding wedge pattern with precise execution using sell limits, stop losses, extensions and pattern analysis delivers reliable trading edges.

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